A Letter To Alibaba Investors, Post-Q2 FY23 Earnings

Dear Fellow Investors in Alibaba (NASDAQ: BABA),

The market does not like surprises. While Alibaba disappointed us with its announcement to abandon plans of a cloud spinoff, it is critical to keep in mind that revenues were up 9% and EPS was up 21% YoY in Q2 FY23. They generated $6.2B of FCF, which was up 27% YoY.

We had hoped to receive separate shares of the cloud business in hopes the segment would achieve a higher valuation multiple in the public markets due to its growth potential.

The two most successful cloud companies in the world see things otherwise. Both Amazon (AWS) and Microsoft (Azure) continue to keep their cloud business as a part of their parent company as the synergies and resources feed one another. The same will be true for Alibaba.

Alibaba now has 33% of their market cap ($74.08B) in cash. It is currently trading at a FCF yield of 13.5% and will begin paying a dividend of 1.1% without halting any share buybacks.

As for management’s concern about the US semiconductor chip sanctions, AliCloud will employ the most advanced chips they have access to. They have 38% share of the Chinese market for cloud and 80% of major tech clients in China. This will not change as most Chinese companies will continue to use a Chinese provider. Despite chip sanctions, AliCloud revenues were up 2% YoY. AliCloud’s adjusted EBITA increased by 44% YoY.

This story is just beginning.

Best Regards,

Preet Saini

Founder, Singh Stocks LLC